Environmental Technologies Industries

Environmental Technologies Industries

Market Plans

China Environmental Export Market Plan

Chapter 6 - Air Pollution

Air pollution in China represents the most serious threat to public health and to the continued economic development of the country. Half of the 322 largest Chinese cities have serious air pollution problems and total suspended particulate (TSP) concerns exist in every city in the country, causing an estimated $3.65 billion in losses each year. Air pollution in a number of Chinese cities is among the highest ever recorded worldwide, reaching more than 10 times WHO standards. Beijing itself ranks high on the national list of cities with excessive nitrogen oxide emissions, and Taiyuan, in Shanxi Province, and Lanzhou, in Gansu Province, rank among the 10 most polluted cities in the world. The threat to public health and welfare is significant: it is estimated that air pollution-related health problems are responsible for over 300,000 deaths and over 11 million emergency clinic and hospital visits annually in China. Similarly, air pollution is responsible for tremendous agricultural and other economic losses. At least 30 percent of China's total territory suffers from acid rain, most of it falling in the southern part of the country.

Coal consumption remains a major contributor to poor air quality, but throughout the 1990s the profile of contaminants has been changing. After peaking in 1996, growth in energy demand turned negative, leading to current reports indicating that China's recent CO2 and SO2 discharges are lower than expected. Yet nitrogen oxide pollutants (of which automobiles are a significant contributor) are on the rise; barring significant changes in transport technology, Chinese oil demand could double in the next 20 years. Similarly, despite moderate reductions in the median TSP levels of many of China's largest cities over recent years, total TSP exposure has actually increased, as the numbers of exposed individuals have outpaced pollution reductions. Dust from construction sites and windblown soil are increasingly important TSP components. In addition to these parameters, a host of other equally important air pollution factors such as carbon monoxide, ozone, and lead are not systematically monitored, and therefore their prevalence and impact are unknown.

Large point sources remain key contributors to air pollution, which in some ways could ease the process of mitigation; the power sector, for example, could account for 50 percent or more of total coal use in the next 20 years.

Policy Framework

The Air Pollution Prevention and Control Law

China has made marked progress in the area of air pollution management since 1987, when the first Air Pollution Prevention and Control Law went into effect. Recent amendments of the law (which was first amended in 1995) illustrate the Chinese government's pursuit of increasingly sophisticated legislation. The most recent changes, effective on Sept. 1, 2000, substantially revised the law. In the law's newest form, its jurisdiction is extended beyond industrial enterprises and power plants to pollution sources such as automobiles, ships, construction dust, and domestic heating and cooking stoves. The new amendments also increase the number of regulated parameters, introduce total emissions control (TEC) to bolster concentration-based standards, provide for far more rigid penalties, and clarify the responsibilities of relevant authorities. The potential enhancement of enforcement capacity resulting from these final two changes may affect impact upon market demand for pollution-reducing technologies if they are faithfully carried through.

If the amendments are fully implemented within the next 10 years, the law could reduce the total volume of air pollutants to 1995 levels, control sulfur dioxide emissions within the SO2 and acid rain control zones at 10 million tons, achieve national level II air quality standards in 34 of the 47 currently identified key cities selected by the State Council, and reduce dust emissions from construction sites in Beijing by as much as 70 percent.

A notably significant amendment is the shift to TEC, an initiative attempted thus far on a limited scale in areas such as the Liao River and the SO2 and acid rain control zones. The policy shift clearly indicates a progression in regulation that moves from point-source and concentration-based approaches to a holistic, "ecologically based" regulatory framework. Additionally, TEC establishes a basis for market-based air pollution control tools such as emissions trading.

Priority Issues

SO2 Emissions. China's national standards for allowable SO2 emissions are comparatively strict at 50 micrograms per cubic meter; the WHO standard is 60 micrograms, and the U.S. standard is 80 micrograms per cubic meter. From 1991 to 1998, levels of SO2 in some of the worst-polluted cities dropped due in part to increased regulation and control. Despite this, most cities experienced worsening pollution over the past decade due to the previously noted increases in pollutants such as nitrogen oxides.

Revisions in the Air Pollution Prevention and Control Law aim to keep annual SO2 emissions at 10 million tons until 2010 in the acid rain and SO2 control zones. Three main policy measures in the acid deposition control program are directed toward SO2 emissions:

1. There will be a gradual phasing out of coal with sulfur content of 3 percent or more. Presently the extraction of such coal is restricted, although not forbidden, since the western regions of China have access only to low-quality coal. Thus, enterprises wishing to burn coal with sulfur content of over 3 percent must install environmental control technologies.
2. Newly built or renovated coal-fired power plants using coal with sulfur content of over 1 percent must install sulfur-scrubbing technology. Existing facilities must adopt SO2 reduction technology including flue gas desulfurization (FGD) by 2010.
3. The current fee level of RMB 200 ($24) per metric ton of SO2 emissions represents a shift in policy from the former scheme, in which charges were imposed only on air emissions that exceeded standards. However, the margins remain far too low to encourage investment in abatement.

These regulations face a number of criticisms and constraints. First, the prohibited use of coal with more than 3 percent sulfur content means that even facilities utilizing FGD technology cannot use low-quality coal, despite the fact that environmental requirements could be met in a cost-effective manner. Additionally, the installation of FGD equipment is considered prohibitively costly for China.

Second, improving the quality of the coal supplied to large power plants has actually increased the supply of high sulfur coal to industrial and residential facilities (as an alternative market), which are less likely to employ clean and efficient utilization systems, therefore maintaining high pollution outputs in urban areas. Issues of coal pricing must also be noted; in general, coal prices do not reflect coal quality and sulfur content. Counterproductive subsidies are sometimes provided to power plants.

Finally, since mass-loading criteria are not yet effectively enforced in any city in China, ambient air quality in any given area may not be affected by the initiatives even if all industries and power plants conform to the standards.

Indoor Air Pollution. Indoor air quality parameters are measurable in any environment, from rural domestic spaces to office buildings and industrial plants. In China, however, most concerns over indoor air quality arise from cooking and heating. Poor-quality fuels and a lack of electric and clean fuel facilities contribute to heavy concentrations of pollutants in domestic households, causing widespread health problems.

The severity of indoor air pollution and its resulting consequences are difficult to measure due to a lack of statistical data on both the national and local levels. According to the World Bank, in 1991 there were 40 million people using gaseous (i.e., nonsolid) fuels for cooking and water heating; by 1998, that level had risen to 156 million. Additionally, the quality of combustible material rose considerably with the increased utilization of briquettes and gaseous fuels.

Indoor air pollution is also exacerbated by China's rapid urban growth and widespread construction of high-rise buildings. In construction during winter months, urea is used in the concrete mix as a curing and anti-freeze agent. During the hot humid days of summer, the urea hydrolyzes, releasing high concentrations of ammonia into indoor areas and resulting in significant health concerns.

Asbestos is yet another concern. Although asbestos was long considered an issue of little significance in China, heightened awareness is increasingly forcing mitigation and the use of alternative materials.

Auto Emissions. The number of vehicles nationwide grew to over 13 million by 1998, about 10-20 percent of which were private cars. That number has further increased in the past three years, resulting in significant congestion and air pollution. The emissions of motor vehicles in China are quite different from those in industrialized countries, due to obsolete manufacturing technologies utilized in the local automobile industry, inadequate auto maintenance, and poor fuel quality. SEPA and other agencies are currently working to develop effective strategies to reduce vehicle pollution and improve performance.

The State Council issued regulations forbidding the production, distribution, and utilization of leaded gasoline by September 1998, and it decided to consolidate the fuel market and close down small refineries that could not meet regulations. Leaded fuel production ceased on Jan. 1, 2000, and sales of leaded gas ceased on July 1, 2000.

In January 2000, SEPA also issued emissions standards equivalent to EURO-1 standards for light-duty vehicles. Heavy-duty vehicles must conform to EURO-2 standards, and all new cars must have electric fuel injection and catalytic converters. According to the law, all vehicles must be inspected annually; however, enforcement capacities present a problem. More reductions could be accomplished with stricter supervision at all levels.

Monitoring. Anecdotal evidence suggests that China's air quality monitoring network has not kept up with regulatory changes over the past 10 years. As the pattern of urban development has shifted, the number of stations and the location of most of them have not changed. For example, government efforts to push small industries outside of cities have led to a worsening of air quality on the outskirts of most urban areas, while the majority of monitoring centers remain in the city centers. Similarly, as noted above, the parameters monitored do not reflect the current profile of contaminants and are not widely established. Monitoring systems exist only in large cities and provide information on SO2, nitrogen oxides, particulates, and settled dust. Carbon monoxide is measured in a few cities, but pollutants such as hydrocarbons and ozone are not.

As expressed in the Tenth Five Year Plan, SEPA plans to upgrade and expand the country's monitoring network. This is in order to monitor the effectiveness of specific environmental efforts and also to gain a more accurate and comprehensive analytical view of the state of China's environment.

Policy Priorities

According to the Tenth Five Year Plan, SO2 emissions are to be reduced by 2.5 million tons. Achieving national air quality standards for the 100 key municipalities during the Tenth Five Year Plan requires RMB 200 billion of investment. According to CRAES, overall investment in air pollution requires at least RMB 300 billion.

The monitoring network must be extended, upgraded, and better maintained. China has an enormous need for training toward these ends, as well as a need for effective analysis of monitoring data. Furthermore, to prove effective, monitoring must include SO2, TSP, PM10, PM2.5, ozone, volatile organics, and nitrogen oxides. These variables are likely to be addressed in future legislation.

Legislative Trends

China is increasingly aware of the steps that must be taken to reduce air pollution. Measures to guard against SO2 emissions, for instance, are widely seen as steps in the right direction, although current legislation needs to be refined to lower its concentrations effectively. In addition, there is concern that other factors such as nitrogen oxide are excluded from calculations, despite the fact that they play a large role in ambient air quality.

Most regulations pertain to thermal power plants and industrial boilers, which constitute a sound first step in controlling emissions and improving air quality, but they do not comprehensively address the majority of harmful air emissions. For example, the drastic increase in TSP concentrations in Beijing in the 1990s seems to contradict the reduction of ground-level emissions from coal-burning sources. Coal combustion contributes only a portion of urban pollution, whereas natural dust from sandstorms and fine dust from unregulated construction sites around the city requires attention.

Jurisdictional Responsibilities and Enforcement

The national government has made swift progress in adopting air pollution control measures in the past six years. SEPA, through a variety of agencies and enforcers, is responsible for monitoring air quality and making recommendations. However, the responsibility of monitoring and enforcement ultimately falls upon local EPBs, the operations of which are plagued with structural problems. EPBs receive policy instruction through a vertical hierarchy at the top of which is SEPA. However, it is the local governments that currently administer day-to-day operations of the EPBs, such as budgets and personnel. Thus, if a local government views a SEPA policy as contradictory to local ambitions, a hindrance to economic growth, or likely to cause unemployment and similar issues that could affect social stability, it has far more capacity to influence the EPB than does SEPA. Similarly, as with other forms of pollution, EPBs often experience logistical difficulties in enforcing government mandates on air emissions. Insufficient inspection capacities, undertrained staff, shortage of personnel and requisite utilities, and numerous other barriers hinder their operations. Finally, reversion rates are high: although over 1,700 polluting enterprises were shut down at the end of 2000 to meet state targets, it is believed that as many as 70 percent of them restarted operations shortly thereafter.

The Market

The Chinese air pollution control market is exceptionally competitive. Japan maintains a distinct presence, accounting for over 30 percent of all imports. Foreign imports account for over 50 percent of all sales in this area because of two factors: local manufacturing capabilities are low, and air pollution control projects have traditionally been financed, at least in part, by multilateral or bilateral aid.

While U.S. equipment is seen as very advanced, the price is often too high for use in all but multilaterally financed projects. Several manufacturers have nevertheless made progress in the Chinese air pollution control market due to a variety of factors (see U.S. Strengths and Opportunities). As the government places higher priority on air pollution control projects, U.S. firms will see more opportunities to win bids.

SO2 Control

SO2 control equipment is a tough sell in the wide-spread Chinese market. There is a mandate for highly polluting coal-fired power plants to install waste gas treatment facilities or technology, but many plants are instead utilizing cleaner coal to avoid retrofitting or installing expensive equipment.

With power demands increasing by a rate of 5-6 percent annually, the power market has been restructuring in order to improve efficiency and reduce pollution. Small thermal power plants are being closed, and priority is being given to clean coal-based pilot projects with single-generation capacity in excess of 300,000 kilowatts.

Indoor Air Pollution

Three factors determine levels of indoor air quality: fuel quality, burner technology, and ventilation. Studies indicate that even when solid fuels are used, improvements in flue gas ventilation can achieve a reduction of almost 90 percent in indoor air pollution levels. While cleaner fuels and cleaner-burning technology often provide the best reduction in indoor air pollution, the most cost-effective option has typically been adjustments in ventilation.

Auto Emissions

According to the World Bank, motor vehicle emissions are already a major source of pollutants in the cities of Beijing, Shanghai, and Guangzhou. It is estimated that vehicles contribute to over 60 percent of the air pollution in urban zones: they are the source of 45-60 percent of nitrogen oxide emissions and approximately 85 percent of carbon monoxide emissions. A number of factors contribute to the problem:

More vehicles. The number of vehicles on the road has nearly tripled since 1990, and the demand for new vehicles is growing by 13 percent per annum.
Poor manufacturing techniques. Obsolete manufacturing techniques, while slowly advancing, have led to extremely poor fuel efficiency in most Chinese vehicles. The average emissions level of new domestic vehicles is almost 10 times greater than that in developed countries.
Poor automobile maintenance. Most auto owners and manufacturers are careless about maintenance measures. Promotion of annual safety and maintenance procedures will lead to greater efficiency and fewer emissions.
Lack of infrastructure. A lack of planning and infrastructure has resulted in vehicle emissions levels comparable to those of industrialized countries 25 to 35 years ago. This lack can be redressed only by efficient policy measures designed to reduce and control the number of cars in key areas and manage traffic effectively.

Table 6.1 Air Pollution Control: U.S. Exports to China (FAS value in thousands of dollars)

*HTS Number*	*HTS Description*	*As of April 2001*	*2000*	*1999*
84041	Boiler parts (super-heaters, gas removers)	833.6	29,830.8	112,849.2
84042	Condensers for steam/other vapor power units	81.0	275.9	N/A
84051	Gas generators	443.0	615.2	144.3
840999	Parts for use with engines of heading	10,091.7	13,482.7	9,931.3
841459	Fans and blowers	542.1	1,850.4	761.8
842139	Filtering or purifying machinery for gases	4,106.3	6,986.3	12,016.8
842199	Parts for 842139	7,025.5	25,592.9	16,126.1

Source: USITC Trade Database.

Air Monitoring

All 100 key cities already identified or to be identified in keeping with the Tenth Five Year Plan are expected to install automatic air quality monitoring systems and transmit this data by satellite to data bases and monitoring centers. According to conservative estimates, this project will require the importation of over $300 million in monitoring equipment and associated technology during its early stages.

The equipment needed for both government (regulatory) and industrial use ranges from sampling and flow monitoring units to analysis equipment. Local manufacturers cannot compete in this market, as they lack the capacity to produce high-quality products. In addition, employees of monitoring centers require advanced training in the operation of monitoring and analytical equipment. Firms able to provide equipment, effective training, and after-sales service will see increasing demand.

U.S. Strengths and Opportunities

SO2 Control

Achieving the targets of the Tenth Five Year Plan requires a minimum investment of RMB 100 billion ($12 billion) in desulfurization technology, broken down in the following manner:

RMB 55 billion ($6.6 billion) in desulfurization technology for thermal power plants
RMB 30 billion ($3.6 billion) in the control of domestic SO2 emissions
RMB 15 billion ($1.8 billion) in desulfurization technology for industrial furnaces

Approximately RMB 6.4 billion ($2 billion) of the RMB 55 billion ($6.6 billion) investment in FGD equipment for thermal plants will go toward installing this equipment on 51 coal-fired power plants within the acid rain control zones.

Clean coal and scrubber technologies such as FGD and circulating fluidized bed (CFB) are prohibitively expensive for the Chinese end user. Often, despite mandates passed down from the central government, no funds or incentives are provided for the use of such advanced air pollution control technology. A key to increasing the use of such technology involves nurturing the capacity to manufacture a substantial portion of the technology within China. Technology acquisition and deployment through licensing agreements, JVs, and other avenues may be critical.

Indoor Air Pollution

As China becomes more aware of the problems of poor air circulation and office building air quality problems, there are opportunities for air cleaners, filters, fans, and blowers of various types as well as coatings and chemical absorbers used for remediation efforts.

Auto Emissions

Several U.S. auto emissions control technology companies are demonstrating a strong presence in the Chinese auto emissions control market. Corning International, in April 2000, moved a large part of its catalytic converter ceramic substrate manufacturing operation to China. While raw materials for this operation are still imported from the U.S., a strong local presence and reduced production costs make Corning a tough competitor in the auto emissions control market.

Air Monitoring

Some U.S. firms, such as Thermo Instrument Systems and Hewlett-Packard, are already well known by Chinese end users. Thermo Instrument Systems has a 70 percent share in the environmental air quality monitoring market in China. In March 2000, Dasibi Corporation, a much smaller player, arranged to install $13.4 million of air monitoring equipment in 33 key cities in China, with the help of the Export-Import Bank of the United States (Ex-Im) and commercial banks. Other active firms include Advanced Pollution Instruments and Environmental Systems Corporation. A strong U.S. capacity to produce high-quality monitoring equipment, coupled with weak capacities among domestic producers to do so, makes this a particularly promising market for U.S. companies.

Foreign Competition, Market-Entry Strategies, and Success Rates

Many Japanese, German, Canadian, Australian, and other foreign firms have gained a solid foothold through numerous tied-aid projects funded by their respective governments. Such strong backing and incentives for export and financing are generally not available to small and medium-sized U.S. manufacturers. Meanwhile, for projects financed solely by the Chinese government, equipment and services will tend to be procured from local Chinese firms, despite quality issues, due to price differentials and protectionism. (As in other sectors, this is starting to change, but only very slowly.)

Nonetheless, Chinese authorities and local decision-makers view U.S. air pollution control technologies as highly respectable. Thus, U.S. companies in the air pollution control field must keep in mind the importance of cutting costs. Outside of multilaterally financed projects, air pollution control technology engineered and manufactured in the United States will have an extremely difficult time penetrating the market in China, but reducing costs will assist in overcoming one of the two primary barriers and will prove vital to obtaining market opportunities as the budding trend of procuring foreign equipment continues to develop.

A Chinese project manager with the Environmental Defense Fund who deals specifically with air pollution has noted, however, the saturation level of the air pollution control market in China. He maintains that unless a foreign company has an innovative or cheap product that can be tailored to fit key policy goals and priorities, it will prove difficult to make headway at this time. A viable commercial strategy might involve an approach that capitalizes on relatively inexpensive local materials and low manufacturing costs. Of course, intellectual property rights (IPR) protection is a concern, as is quality control of locally-generated equipment, parts, and services. Additionally, as is the case in most Chinese markets, firms must consider the importance of maintaining good relations with Chinese authorities, buyers, and other market players.

The World Bank and other multilaterally financed projects still provide the best opportunities for U.S. technology exports due to the availability of hard currency, an open bidding process, and a number of risk-mitigating factors.

Selected References and Web sites

References

Hu Chengnan. "Development and Market Analysis of Control Technologies for Motor Exhaust Gas in China." China Environment.

Lee Chyen Yee. "Smoggy China must do more to curb global warming." Planet Ark Nov. 10, 2000.

Weisbrod, Roberta E. "Solving China's Urban Crisis: China's Transportation Energy Future." Journal of Urban Technology 6, no. 1 (April 1999): 89-100.

Web Sites

Environmental Defense Fund: www.edf.org

World Health Organization: www.who.int (includes air pollution control standards and regional concerns).

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